How to Tell If Your Bank Is Safe or in Trouble

Spot the red flags

Bank buildings
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If you have concerns about whether your funds are safe in your local bank, several signs can alert you when a bank is in trouble. If your bank starts closing multiple branches, laying off staff, doing away with incentives such as fee-free accounts, or enacting sharp increases in fees, it could be in trouble and looking for ways to conserve cash.

If you're loath to switch banks and remain unconvinced, you can also check for signs such as declining deposits for the current year over last year by looking up your bank on the FDIC.com website. If you hear news that the bank has delayed financial reports such as earnings releases, it could mean the bank's struggling with a changing valuation.

If you really like numbers, you can view the "Uniform Bank Performance Report" on the Federal Financial Institutions Examination Council website. This report lists various financial ratios and shows whether your bank's capital ratios are deteriorating as compared to its peer banks.

While banks promise to give you all of your money back instantaneously upon your request, they don't have enough cash on hand to pay every depositor at once because they lend the funds out to other customers.

Regardless, safeguards also exist at banks to protect your funds up to a certain limit, so with a little due diligence, you can ensure that your money is in a safe place.

Bank Safety Checklist

You can take a proactive approach to making sure your funds are safe at your chosen bank or credit union in the following ways (more detail about each item appears below):

  • Check for insurance coverage: Only deposit your funds in banks that state that they're insured by the Federal Deposit Insurance Corporation (FDIC) or credit unions that state that they're insured by the National Credit Union Administration (NCUA). While most financial institutions are insured by these government entities, it's not mandatory.
  • Mind the cap: Even though your funds are insured, the coverage is capped at $250,000 per person, per account, per entity. If you have additional funds, consider depositing them at another bank or putting them into certificates of deposit, which are also FDIC-insured.
  • Keep tabs on the news: Be aware of any news that mentions the possibility of your bank being acquired or sold. This is usually a sign of financial distress.
  • Check your bank out: The FDIC keeps its problem bank list confidential, but the Bankrate website uses a similar grading system for its "Safe & Sound" bank ratings and allows you to look up your bank by name and zip code to get Bankrate's opinion of the institution's safety rating.

Deposit Insurance

First, be sure that your money is deposited in a reputable bank or credit union. One of the most powerful safeguards is insurance backed by the U.S. government. For banks, you’ll want FDIC insurance. Credit unions use NCUSIF insurance.

Make sure that you understand the limitations of these programs. You can still lose money if you have too much in one institution. The insurance covers funds up to $250,000 per person, per account, per entity, so if you'd like to take extra precautions, spread your money around to ensure that if one bank goes down, all of your money won't be lost.

If your money is fully and properly insured, you have very little to worry about. If your bank goes belly-up, you might notice if your financial institution makes the news, but FDIC and NCUSIF programs generally ensure that you can use your same accounts, cards, and websites without interruption.

There is rarely any reason to take your money out of a failed bank or join in a run on a bank. Why? Learning what happens in a bank failure or a bank run will give you a better idea.

Bank Ratings

If you want to avoid bank failures, you can try to avoid weak banks. To identify weak banks, check rating services to see how your bank or credit union is rated.

After the financial turmoil of 2009, the FDIC had 900 banks on its "problem bank list." This list, while confidential, analyzes banks in terms of the amount of outstanding loans and payback or loss amounts, the amount of loans the bank has charged off due to nonpayment, its overall assets, net interest margins, and many other statistics that reveal a bank's financial health and stability.

By 2018, thanks to many key banking industry changes, the number of banks on the FDIC list numbered less than 100. If banks continue to have problems and can't make it off the problem bank list, the FDIC steps in and takes control of the bank; sells it to a more financially viable, stronger bank; or liquidates the bank's assets and refunds all of the bank customers' deposits.

Read the News

If you have money at risk, you can also follow the news to see which banks might be close to failure. Of course, nobody knows what will happen ahead of time and you might be led astray. However, there was a lot of talk about Washington Mutual and Wachovia before they failed in 2008.

Note that if you are fully insured, you can, of course, ignore the stories and leave your money where it is. Another bank will buy the assets, and you'll be able to use your money without interruption—in most cases. Participating in a bank run can help accelerate or cause a bank's failure, and it might just be a waste of your time.